Since the end of World War II, the federal government has never been able to increase tax revenues above a certain, specific level for any length of time by increasing tax rates. There is a natural limit on what the U.S. government can take away from the American people each year, and nothing the government has tried over the past eight decades has ever been able to change that.
Any attempt to deal with ongoing federal budget deficits and an excess accumulation of debt obligations must accept that reality. No amount of tax rate hikes and new taxes will raise any appreciable amount of additional federal revenue. The tax side cannot solve our persistent deficit problem.
Only economic growth will do that, this paper argues, and its impact will be cumulative, over a period of years, and initially limited on an annual basis. There is no way to raise federal revenue rapidly at present. With the budget deficit currently so high and headed higher, the inability to achieve a rapid rise in revenues means all the reforms will have to be on the spending side—unless the government chooses the catastrophic course of devaluation of its debt through monetary inflation. There is no other option. Until policymakers and the public accept that reality, there can be no serious progress toward reduction of the rising federal deficits and national debt.
Executive Summary
- Federal tax revenue has historically hovered within 1 or 2 percentage points of 17.4 percent of GDP since World War II, no matter what the tax rates have been and what is taxed.
- There is a natural limit on what the U.S. government can take away from the American people each year, and nothing the government has tried over the past eight decades has ever been able to change that.
- The pursuit of ever-higher “taxes” through higher tax rates and/or taxes on more things fails because raising tax rates and raising tax revenues are two different things. Raising taxes on an activity reduces the amount of that activity.
- The inability to achieve a rapid rise in revenues means effective reform will require major spending cuts.
- It is possible to increase tax revenues over the long term by increasing the tax base. The only way to expand the nation’s tax base is through economic growth.
- Cutting tax rates and regulations expands the economic pie from which the federal government claims its share, as demonstrated
S. T. Karnick is a senior fellow and director of publications for The Heartland Institute.
